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Did subsidies drive MD and Lockheed from commercial jet biz?

American Airlines MD-80 jets sit on the tarmac at Dallas/Fort Worth International Airport in 2008. (Rick Gershon/Getty Images)

Two analysts disagreed last week over whether European subsidies to Airbus drove McDonnell Douglas and Lockheed out of the commercial airliner business.

First, Defense analyst Loren Thompson, of the Lexington Institute wrote: “(A)s Airbus leveraged subsidies to aggressively price its planes and expand offerings, U.S. producers gradually lost ground. Lockheed exited the business in the 1980s. McDonnell Douglas effectively gave up in the 1990s. Boeing saw its market share fall from over 60 percent to under 50 percent in the current decade. As a result of these setbacks, tens of thousands of American aerospace jobs disappeared, and tens of billions of dollars in export earnings were lost.”

The U.S. government must demand fair treatment of its exporters, Thompson wrote. “What bothers me, and no doubt Boeing, is how European governments have been allowed to deliberately and systematically destroy America’s global lead in jet airliners without any real sense of outrage in Washington.”

Local analyst Scott Hamilton responded that McDonnell Douglas and Lockheed essentially failed out of the commercial airliner business.

“McDonnell Douglas failed in commercial aviation because of a failed business model that over-relied on derivative aircraft instead of new airplanes,” he wrote. “The last truly new airplane MDC designed and built was the DC-10; the MD-11 was a derivative of this airplane and not very well executed at that.

“The MD-80 was a derivative of the DC-9, which was introduced in 1965. The MD-90 was a derivative of the MD-80.”

Lockheed, meanwhile, left the airliner business 12 years before Airbus came to exist, and then returned two years before the first Airbus A300B2 entered service with the L-1011 TriStar: “a direct competitor to the DC-10 that was so identical in size and performance that the two airplanes split the market and neither MDC nor Lockheed made money on their airplanes,” Hamilton wrote. “Furthermore, Lockheed nearly went bankrupt because Rolls-Royce, the sole engine provider, did go bankrupt. Rolls had to be bailed out by the UK government and Lockheed was bailed out by the US government. Airbus had nothing to do with either event.

“Thus, the reality is that Lockheed survives today because of a US government bailout.”

In a subsidy tangent, one of the many news items during my vacation last week was that 15 U.S. senators and 125 U.S. representatives signed onto letters urging President Barack Obama to make the Air Force’s aerial refueling tanker request for proposals account for this year’s interim World Trade Organization ruling that European governments illegally subsidized Airbus aircraft. The Airbus A330, of course, is the basis for the Northrop Grumman-EADS tanker competing against Boeing’s 767- and (potentially) 777-based offerings.

The two letters are virtually identical and, while not mentioning the tanker contract specifically, they clearly refer to it in saying: “Foreign governments or companies should not be rewarded for products that benefited through the use of illegal subsidies or flagrantly disregarding international obligations.” (Senators’ letter) and “Our policies should not reward foreign governments or companies that benefited from illegal subsidies.” (representatives’ version)

Interestingly, both end by saying: “When the WTO’s final ruling in this matter confirms U.S. claims that Airbus products were illegally subsidized, we will be committed to ensuring this principle is upheld.”

That seems to indicate the senators are representatives are hoping the government will act once the WTO finalizes its ruling. Some have called for action based on the interim decision, but the fact that it’s not final has been one objection from administration officials.

The other objections are that there’s still an appeal process, a European counter-claim against U.S. subsidies to Boeing is pending and the WTO has a formal process for imposing sanctions, although that excludes military procurement.

Sen. Patty Murray, D-Wash., led the effort behind the Senate letter, while U.S. Reps. Todd Tiahrt, R-Kan., and Norm Dicks, D-Wash., spearheaded the House letter. The signers came largely from Boeing-heavy states.

Boeing responded to the House letter with a statement saying it was “encouraged to see such strong bipartisan congressional support for U.S. action to end the illegal subsidies that European governments have for decades provided to Airbus at the expense of American industry and its workers.”

Northrop Grumman spokesman Randy Belote said the company “fully supports the Defense Department’s position that the dispute regarding the worldwide sale of commercial airliners is not relevant to the procurement of aerial refueling tankers for the U.S. Air Force. It is obvious that Boeing’s supporters will not be satisfied until Boeing has no competition in the DoD’s tanker replacement program and Boeing is awarded a sole source tanker contract.”

Note: This is a seattlepi.com reader blog. It is not written or edited by the P-I. The authors are solely responsible for content. E-mail us at newmedia@seattlepi.com if you consider a post inappropriate.